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Dollar affects profits
Since 2002, the US dollar has weakened by a full 30 percent against
the Euro and the Canadian dollar. Naturally, currency fluctuations of
this order have a major impact on the competitiveness of countries and
companies alike.
■ Theoretically, a weaker US dollar should lead to shifts in prices
and costs, compared to e.g. Europe, by the same magnitude as
the currency change. Subsequently, the effect of this ought to be
increased exports from and decreased imports to the US.
How does this affect our customers? Forestry industry players often
have production costs in one currency and sales in another. Forest
industry products are generally traded between regions in US
dollars. A full 30 percent of world trade in paper and board is
transnational, so the impact of currency fluctuations is considerable.
THE MAJOR NET EXPORT COUNTRIES, that is, Canada, Finland,
and Sweden are most affected. For Canada, the world’s largest
forestry product exporter, the currency fluctuation has presented
a considerable disadvantage and is a strong contributory factor
to the extensive closures of recent years. This is one of the
largest economic factors affecting Europe as well, where export
represents 10 percent of production capacity, corresponding to
11 metric tons. The larger part of this comes from Finland and
Sweden.
Most paper and pulp products can be considered commodities,
so currency fluctuations have a more direct effect on profitability
than for specialized products. The mature markets of
North America and Europe exhibit excess paper capacity and
weak or declining demand for several grades.
So despite its favorable currency position, due to declining demand
and an under-invested industry, the US has not been able
to take advantage of the situation. Instead, the excess capacity
and increased costs of input goods of recent years have led to
closures at a rate never before seen.
Europe has also seen closures, which would normally give rise
to a better balance between supply and demand, thereby allowing
price increases. This expectation has, however, not been realized,
not least due to the strong Euro, which led to reduced export
opportunities, and by persistent excess capacity. If the current
dollar-euro exchange rate holds, Europe will need to further
rationalize the industry if it is to attain reasonable profitability.
FOR PULP PRODUCERS, the reduced availability and increased
cost of raw materials, together with other increased costs, has
caused a dramatic rise in production costs. Since the dollar started
weakening in 2002, the price of bleached long-fiber pulp has
increased by an average of 46 percent while bleached short-fiber
pulp has increased by 40 percent. For pulp exporters outside the
US, however, most of this gain has been countered by the weak-
BUSINESS
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A full 30 percent of world trade in paper and board is transnational,
so the impact of currency fluctuations is considerable.
er dollar. Canada in particular is very hard hit by the low US dollar
exchange rate.
CURRENCY FLUCTUATIONS are often overlooked when describing
the forest industry’s situation, despite being one of the key factors
influencing the industry’s, and consequently our, profitability.
PricewaterhouseCooper’s latest forest industry report shows
the average return on working capital for the world’s 100 largest
forestry companies to be no more than 5.1 percent for 2006. A
generally accepted goal within the industry is a return of 10-12
percent. The report also ranks the depreciation
of the US dollar highest in its list of the
economic factors behind the forestry industry’s
prolonged profitability problems.
Lene Schack
Head of Eka
Business Intelligence
ekaecho | # 4 2007 9